PENSIONS IN CEF COUNTRIES

1. PENSIONS IN CEF COUNTRIES AN OVERVIEW DUŠAN KIDRIČ UMAR/IMAD

2. Transitionsfrom • one complex and federal state to single independent states (for some countries) • Not completed jet • socialist to parliamentarian political system • no market to market economy • war to peace • Completed (?) • public obligation to private responsibility for social security Dušan KIDRIČ

3. Implications touching pensions in transition countries • Decrease in activity all • Less insured persons all • Increase of informal activity – employment all • Evasion of contribution payment all • Decline of revenues disposable all • Increase of beneficiaries all • Pension arrears some • Reduction of pension benefits all • Same pension providers (institutions) Mainly • Unchanged way of operating Mainly • Distrust in current pension system some Dušan KIDRIČ

4. Population, retirement Dušan KIDRIČ

5. Responses to the situation • Pension reforms • New concepts • Political and social discussion • Parametrical adjustments (tightenining) • New forms of pension provision and practice • International assistance Dušan KIDRIČ

6. New ones Empowering Individualization Poverty alleviation Actuarial fairness (Pre)funding Diversification Traditional ones Redistribution Solidarity Earning based rights Social justice PAYG Equalization Political and social discussion on concepts Dušan KIDRIČ

7. Reforms adopted Dušan KIDRIČ

8. Parametric changes • Rising statutory retirement age • Range 62 to 65 for men • Range 56 to 65 for women • Reduction of yearly accrual rate • For 0 to 0,5 percentage points • Enlarging qualifying period • Range from18 to 40 years • Increase (reduction) of pensions when retired later (earlier) • From 0 (non existing) to 3,6% per additional (missing) year Dušan KIDRIČ

9. Parametric changes • Capping the benefits and contributions • All possible combinations • Invalidity adjustments • More severe conditions • Indexation of benefits • Les generous, more complicated • Opening the scale of total accrual rates • Yes and not • Instruments for achieving actuarial neutrality • Not many (one certainly) Dušan KIDRIČ

10. Main data Dušan KIDRIČ

11. Two gender specific systems Dušan KIDRIČ

12. Legal retirement age and life expectancy Dušan KIDRIČ

13. Adjustment of benefits and indexation of pension base • Variety of rules Dušan KIDRIČ

14. Level of benefits • Generally very low • Less than 50% of average wage • Minimum benefits (minimum pension, guaranteed pension) still lower • Around one third of average pension • Distribution of pensions • Concentration on the lower classes Dušan KIDRIČ

15. Low coverage Dušan KIDRIČ

16. Fiscal elements current situation • Less contribution revenues than obligations (except in case of FBiH) in pension systems • Need to budgetary transfer • Contribution rates and contribution bases different from country to country and even in the same country Dušan KIDRIČ

17. Demography(Problems with population census) Ageing Life expectancy will (with high probability) increase Fertility rates are low Migration will cause shortage of labor supply Economic performance Integration in a larger economic area Catching up the neighbors Foreign direct investment Better utilization of domestic resources Peace Some elements for assessing long term perspective Dušan KIDRIČ

18. Social stratification Poverty Low pension benefits Low coverage Enrichment In the privatization process New monopoles Free movement of people Social cohesion and social in(ex)clusion Older workers Heavy adaptability Elderly people Alone and not enough support From family Systemic Health services provision Some social phenomena to be taken into account Dušan KIDRIČ

19. Fiscal elements long term perspective • The contribution rates could hardly be increased • The share of contribution revenues will decline or in best option remain the same as it is now • The amount and share of pension obligation will increase • Due to ageing of population • Due to non possible reduction of current level of pension benefits • The difference between obligations (liabilities) and revenues (assets) will increase Dušan KIDRIČ

20. Pension reform (mainly financial) answers • Introduction of explicit funding • Mandatory as a II. Pillar according to WB classification • Croatia, Macedonia, Bulgaria, Romania, Kosovo, … • Voluntary • All except BiH • Introduction of a NDC for a first mandatory pillar • In consideration in many countries Dušan KIDRIČ

21. Explicit funding • The chicken / egg phenomenon • Underdeveloped financial market • New and not enough financially solid domestic intermediaries • Lack of expertise • Very few domestic financial instruments • Low premiums • High initial cost • Bad country risk rating • High fees and low return on available instruments • Regulatory and supervisory problems Dušan KIDRIČ

22. Members in the new pension schemes • At the end of 2006 more than 5 millions persons are included in mandatory or voluntary (pre)funded pension schemes • Most of them in Bulgaria and Croatia • Macedonia • Slovenia in a voluntary (but mainly collective) pensions schemes • In the 2006 and 2007 is expecting to start (or started yet) in many other countries Dušan KIDRIČ

23. Pension reform (less financial and more social ) answers • Enlargement of state subsidies • For non insurance based benefits • Maternity leave • Military service • Veterans • … • Introduction of a state (social) pension as a universal benefit in the old age – zero pillar • Redefinition and redesigning of existing minimum benefits in pension and social assistance systems • Possible reduction of pension contribution as a part of labor cost Dušan KIDRIČ

24. Conclusions • Parametric reforms were introduced and the new parameters gave the possibility to master current fiscal problems • Politically the reforms are always under revision; they are many signs that some parameters are not any more sympatric to politicians • To cope with long term fiscal sustainability, the reforms have to open new instruments to strengthen the individual responsibility and make clear consequences for individual decisions • The pension providers have to supply better and accurate information of individual and common (societal) pension situation Dušan KIDRIČ

25. Conclusions • Mandatory redistributive part of the pension system has to rethink the “philosophical” bases of social insurance • Is the limitation of solidarity exclusively on formally employed persons and on those with achieved (prescribed) work history still sufficient? • Could be social cohesion and general taxes as revenue the rationale for enlarging the eligibility criteria • The new forms of calculating pension base seem to be more convenient to changed and changing world • The NDC system is one of newly introduced type, which could serve also for financial literacy purposes in (pre)funded schemes Dušan KIDRIČ

26. Conclusions • Explicit funding (second and third pillar) have the same logic and limitations • The length of saving period has to be as long as possible; in connection with social insurance part both are interested on prolongation of activity • The premium or contributions have to be greater then currently are. The complementary nature of supplementary pension insurance will fulfill the expectations only with sufficient assets on individual accounts • The new pension providers must have in mind that fees and costs are essential for social acceptance of them • If the sentence “Get reach – slowly” is valid for pension saving, the same must be observed from new financial intermediary Dušan KIDRIČ